Three Critical Things to Look for in Pre-IPO Companies

This week’s Venture Spotlight is bound to be a classic.

It’s where I reveal not just my favorite sector for big gains (and my least favorite, too)… but the three critical things I look for in all private equity deals.

These are traits we can’t compromise on.

Get them right… and the sky is the limit.

Get them wrong… well, you’ll leave money on the table.

I detail them all in this week’s video. Click on the video above to watch it.

Enjoy!

Note: Next week… we’ll dive into some companies that don’t meet these strict criteria. It’ll be a good lesson in which investments to avoid.

TRANSCRIPT

Alex Moschina: Hello, everybody. Happy Friday. Welcome to this week’s Venture Spotlight. Thank you for joining us. I’m Alex Moschina. I’m the associate publisher here at Manward. As always, I’m joined by Andy Snyder, our founder, and the champion of all things pre-IPO. How you doing, Andy?

Andy Snyder: Pretty good. It’s the champion of something, that’s for sure.

Alex: He’s is Manward’s champion. We’re here, as we are every Friday going forward. This is what, the third one of these that we’ve done?

Andy: Yeah.

Alex: And hopefully the third of many, many, many. We’ve gotten some really good responses so far. I’m really glad that everyone’s as excited, or seems to be at least to my face, as excited about this as I am. We’re going to talk about some things that are confounding people. It’s going to be a little bit of a continuation of the conversations we’ve already had. Last week we were talking to the founder of a $51 million metaverse company that we’re very excited about. And we’re going to, like I said, we’re going to continue going down that road today.

But we’re going to start someplace where I don’t really think either of us expected to be starting any of these, and that’s with talking about football, or more specifically talking about the Super Bowl, and the fact that the metaverse kind of had its soft debut to the world via the Super Bowl over the weekend.

Andy, did you see all the metaverse commercials?

Andy: I did, and so it’s a good sign. I actually thought there’d be more, but Miller Lite did some pretty cool things before the game, I know there was a concert after the game, so a concert in the metaverse after the game, so there was some interesting things. And the reason I think that’s newsworthy or worth studying, is you look at Bitcoin. Bitcoin was the big one, really, or Crypto was the big one at the Super Bowl. And really, you look at all the different industries in there, and they’re all investing gems right now. So just using the Super Bowl as an indicator, those ads are the things that we need to be looking at.

And specifically to Venture Spotlight, and I know we have a ton of new folks this week, and so what we’re doing here is taking what we do on the public side of the market, and taking that to the private side, so now we can get into much smaller companies as startups. And what better opportunity, than to look at an industry that is just getting its footing? We’re at the genesis of this. Most folks had no idea what the metaverse was until Facebook changed its name to Meta, what, three months ago, if that? And so it’s still very much new and on the tip of the tongue of a lot of investors and a lot of folks, just because it’s the first time hearing it. And that’s the cool thing about what we saw in the Super Bowl, is the ads that we saw were very basic and still trying to get a grasp on things, but it’s a big clue for investors that have paid attention that, hey, we’re at the start of something here, let’s dive into it deeper. A big, big opportunity in putting that together.
Alex: It seems to be, with a lot of these emerging technologies, you start silly, right? A lot of those commercials were silly. It was just trying to get people comfortable with the idea of a metaverse. It was, oh, hey, here’s this football player on the metaverse, here’s you could play video games and drink beers virtually in the metaverse. You can go see the Foo Fighters play a concert in the metaverse. It’s a lot of just come check this out. I mean, I can’t remember what year it was, but I’ll just say it was 2011, 2012, it feels like, when Dominoes sold the first pizza and somebody was able to pay with Bitcoin. It’s a lot of the same story, where there were certainly headlines of people who are metaverse skeptics, and I’m not fully sure what to expect, but it is like crypto in its very nascent forms, I think.

I was talking to a friend of mine who actually works for a crypto exchange, and we were talking about the fact that in 2010 I was with everybody being super skeptical about it, I was writing about it because I had to, and I was just what is this dumb thing? These papers and these founders are so idealistic. There’s no way people are going to use Bitcoin. Then in 2014, I’m like, “Oh man, okay. This is getting serious. I guess we should probably write more serious, I’ll stop making fun of it and maybe learn about it. Then, 2016, I’m starting to take ownership of my first bit of Bitcoin. And then last year, I’m just grabbing people and saying, “Wow. The founders are actually doing all the world-changing things that they said that they were going to deal with Bitcoin.”

And I don’t know that the metaverse is going to have the exact same adoption curve, but it will follow an adoption curve, regardless of where it ends up. And it’s just funny to see that if you’re starting at the Super Bowl, that’s a pretty good place to be starting out. There just seems to be tons of questions, but also tons of potential with these companies.

Andy: Exactly. And that’s, again, Meta or Facebook is on the big side of that, but there’s a ton of companies on the small side, just starting out with new ideas and all the things that make it happen. So there’s, again, going back to the rationale, the mission here of Venture Spotlight, that’s what we’re looking for is these young companies starting up and the opportunities that we can get in for them. A $51 million company doing big things in the metaverse, that’s easy target for a Facebook, a Google, even an Amazon, all the potential that’s out there.

Alex: So we’re seeing a lot of this investment, not just in the metaverse, but we’ve already mentioned crypto – I won’t stop talking about it – and there’s a lot going on in the past year. You sent me an article earlier today talking about what was going on in Miami last year, as far as blockchain investing, and investing in blockchain-based startups and actual cryptos down there. Miami is becoming sort of the, what, it seems like the crypto Silicon Valley of the Southeast?

Andy: Yeah.

Alex: But this is just kind of going to be this situation, where we see this ballooning of companies in this industry. So how am I going to pick them? I suppose that’s the question that the person watching this is thinking. So, Andy, great. There’s all these companies that may be acquisition targets. Is that all I’m looking for? Am I just looking for an acquisition target? How do I find that? I know that you have obviously much more strict criteria for that, so do you want to get into some of the things that you’ll be looking for, not just in crypto or in the metaverse, but just in general in a startup?

Andy: Yeah. So I think 100%. So I think you hit it there with it’s not just in crypto or metaverse. Yeah, that’s what we’re excited about right now, and really because our most recent recommendation is in that space. So, of course we’re excited about it, but not everything that we do in Venture Fortunes, where we really focus and make these recommendations, but in Venture Spotlight, we want to talk about how to research and how to find them, and the nuts and bolts of the things.

And so really, what I look for is three big things, and each of those almost acts like an umbrella over various things, but does the company offer something that’s novel, something novel or new? Is it doing something that everybody else is doing? In the crowdfunding space, I mean, I can go out there and find you 50 different vodka or spirit distillers that are looking for money. And they all have their unique branding, and we know one of them might do well. Finding that one’s going to be very hard, because there’s a sea of competition out there, and the industry’s pretty watered down right now, so they have to be doing something unique. And in crypto, blockchain and the metaverse, there’s all sorts of opportunities there to find a company that’s doing something that nobody else has thought of, or is the next big leap forward, so that’s first.

And then it gets into one that we can slip a little bit. Doing something novel is something that I really don’t compromise on, but the total accessible market, like the market that they can get into. So if a company’s working in, let’s just say, it’s a billion-dollar market, it would have to have, to make investors as rich as they want to be, it would have to be a 100% market share in that billion-dollar market to really bringing those investors some money. But if we get into a trillion-dollar market or, multitrillion dollar market, then having just that little slice of that is so much easier. And, better yet, grabbing a 25% or a 40%, which would be big, a slice of that, that really starts to add up, and so that addressable market is huge.

Now we can go around that by finding something in the middle where, if we do think a company can absolutely dominate, I don’t mind investing in a company if it’s going to dominate a $25 billion industry. There’s enough money for a lot of folks in that, but we just have to weigh it. But definitely the path of least resistance is finding the companies that are doing big things in a big industry. And Apple is, a great example of that. It’s one of really two players working in an operating system that is on every desk, in every office in the country, or in the world, really. So that’s huge, and their multi-trillion-dollar market cap shows that, and investors got rich by following that. So those first two are pretty easy.

And then we get into a strong management team. This is where you’ve got to put the thinking cap on and have some experience, do some research. But a lot of people can talk a good game, and a lot of people have a good game, but if that they don’t have the skills and experience and connections to bring it to life, it’s not going to be anything. I always talk about the fellow that invented the Phillips screwdriver, the multi-pointed Phillips screwdriver. His name wasn’t Phillips. He couldn’t sell the thing, and so he was getting drunk at a bar one night and ran into a guy named Phillips, sold his patent to him. That Phillips guy took the same technology and used the gift of gab to sell it to some of the big automakers, made a name for himself, made a ton of money, and so really that management team is crucial for being able to push things forward. So something novel, big market, and an experienced team that can actually do it and bring it to life is huge.

Alex: Okay. I mean, those all make sense. Now, is there any nuance between industry, or is that just where you’re starting, when you’re looking at an opportunity, regardless of where it is, whether it’s blockchain-

Andy: Yeah-

Alex: Or whether it’s healthcare, whether it’s the metaverse or what have you?

Andy: Sure. So, there is nuance in industry, so you’ve got to think of, again, that addressable market. Auto sales, it’s going to be a certain-sized market. Healthcare is a huge market, and there’s a ton of opportunity there. But then you get into technology where it’s almost infinite, where you think about the metaverse. And the way I think of it is when Christopher Columbus or whoever discovered North America, it was, for our analogy, we’ll say it was barren. There were millions of people here already, but it was barren, big new economy. It was a whole new economy for the world there, and we’re still reaping the rewards from that, and that’s the way I think the metaverse could be. It’s not going to be that way in 2023 or 2024, but ten, 15 years out, we could see a doubling of the potential money that’s out there, because we’re replicating so much of what’s happening in the real world over there, if everything comes to life the way I think it could.

So that’s huge, that’s very, very big. So it’s on this spectrum where you might have, I don’t know, paper makers or spoon makers. There’s only a certain number of spoons you can sell, a very finite industry, so you’ve got to weigh that. And so technology, and I mentioned healthcare. I think healthcare technology, that’s definitely going to be something we talk a lot about within Venture Spotlight, because people are going to pay a lot of money for their health. The demographics are in its favor, and the technology is just expanding exponentially. So, super-exciting places there, but really just got to think about that, again, it comes to that total accessible market.

Alex: So we’ll get into more specific industries, and more specific things that you’re interested in, as we go on with this series. We did promise that we’re going to keep it short, so I do want to wrap up here, but I’ll just run through them again. It sounds like you’re saying having that big market is maybe the number-one thing. But let me just run through your three criteria, correct me if I get any of them wrong, but it’s does the company offer something novel, does it have a huge market waiting for it, and then does it have a strong management team?

Andy: Yep, nailed it, 100%. Those are the three that we really don’t compromise on. There could be other variables, but we have to stick with those, and when we get outside of that, that’s when we start to run into some trouble. And that goes for stocks as well. The thing with stocks is we have trading opportunities with private equity, equity crowd funding. We had to wait for an acquisition or going public, something like that, so we don’t have those short-term spikes to take advantage of like we do with stocks. So if it’s a small company that is just trading cheaply because of something, it could have a lousy team, it could have a lousy product, but if it’s still trading at a big discount to its price, and I think the market will correct that in two weeks, it’s a worthy buy. That’s not quite the case with private deals where the timeline is longer, so that’s why those three things are so much more important.

Alex: The timeline’s longer. And the people doing their due diligence, let’s say they are a takeover target, you’re going to have some very smart people from a much larger company coming in and kicking the tires and poking around that management team. So if it is awful management, either those people are going to get kicked out or they’re just not going to get pulled into the mothership. So, I think that’s a great place for us to leave it. We will be coming back to those three points. I think we’ll be referring to them often, so maybe we can add them to the Venture Spotlight glossary or something like that.

Andy Snyder: Yeah.

Alex: But, as always, I’m excited for next week. I’m glad that we have had a decent amount of success so far getting everybody as excited as we are to tune in each week, and we’re just going to keep doing this. If you have any questions, or if you have anything in particular that you’re interested in hearing about in the private equity world or startup investing, feel free, you can always email us at mailbag@manwardpress.com. But yeah, I’m looking forward to doing this again with you, Andy, in seven days.

Andy: Yeah.

Alex: And, yeah, we’ll just keep knocking these out.

Andy: I think next week, let’s just plan on looking at those three things. And we can run some of the companies that I look at on a weekly basis through them, and show the good and bad. So I can pick three or four different open deals right now and run them through that, just so you can get a sense of my mindset and what I’m looking at. So let’s pencil that in for next week, unless we get a chance to talk to another CEO or something. But we’ll plan for that, and hope folks tune into that and see what we’re up to.

Alex: Sounds great. We’ll also get to show you guys around some of the platforms that we could find these deals on. So, all in all, we’re going to hopefully spread some knowledge, and we’re going to have some fun, and we’re all going to be better people, but that’s real-

Andy: I don’t know about that. Don’t make any promises.

Alex: Well, some of us don’t have much room to improve, but, listen, like I said, thank you so much for joining us. We will see you next week, and until then, have a great weekend.